No ‘BRICS’ meet has possibly attracted as much global attention as the 15th summit, which is to be hosted by South Africa in Johannesburg from `August 22 to 24. South Africa was under heavy domestic and international pressure not to host Russian President Vladimir Putin for the summit. Pretoria was saved from a diplomatic predicament when it announced on July 19 that Putin would not attend the Summit.
When British economist James O’Neill coined the acronym ‘BRIC’ for countries he identified as being at a similar stage of newly advanced economic development, he argued that global governance was not optimal anymore and there was a need to change the structure to give big emerging countries more power. Eight years later, the leaders of those four held their first summit, turning an economist’s thoughts into a global organisation, incorporating South Africa a year later. Twenty-two years since that articulation, and fourteen years since its formation, BRICS has emerged as a significant grouping with a growing clout in global economic governance. Accounting for 31.5% of global GDP, the five BRICS nations – Brazil, Russia, India, China and South Africa – together supersede the GDP contribution of the G7 nations which stands at 30.7%.
In a post-pandemic world, with an ongoing war in Ukraine, expanding Western economic sanctions, heightened antagonisms between US and China, geopolitical tensions with Russia, SWIFT restrictions, collaring at the UN’s various bodies, suspension from Financial Action Task Force (FATF), policy debates around alternatives to the Bretton Woods system have heated up. As targeted countries begin exploring the possibility of settling international payments in local currencies, the possibility of the BRICS forum leading the way is being debated.
Representative image of currency notes. Photo: Pratikxox/Pexels
Discussions around new members, new governance and new currency
The New Development Bank (NDB, sometimes called the BRICS Bank) has arguably been the one concrete success for the BRICS political grouping. The NDB was established to promote the financing of infrastructure projects among developing countries, has expanded, and finds itself placed to challenge existing multilateral development institutions.
The NDB’s mandate is to mobilise resources for infrastructure and sustainable development projects. Time and again, the five-member nations have agreed to extend credit facilities in local currency to each other. But this has not been so easy given that the US dollar is the current base currency in global trade. Financing of the NDB comes from the world’s major developing economies. This translates into financing from one developing country to another within the framework of New South-South cooperation. Undoubtedly, the capacity of the new Development Bank has been enhanced since its inception. But whether the NDB will undertake sensitive and complex infrastructure projects in the future is the key question. The other is what amount of financing can NDB make available.
In the first benchmark issuance since the Russia-Ukraine war, the NDB, issued a US $1.25 billion, three-year green bond, in April with a ‘use of proceeds’ clause stipulating that any funds raised will not be used to invest in Russia, that attracted investors from diverse jurisdictions, not just the BRICS members and NDB members Bangladesh, United Arab Emirates, Egypt and Uruguay.
After the start of the Ukraine war, and the imposition of wide sanctions against Russia, none of the other four BRICS nations participated in the economic sanctions against Russia. However, the BRICS bank announced that it has put new transactions in Russia on hold. Post Crimea-2014 too, the BRICS Bank found it difficult to lend money for Russia’s infrastructure projects. Posting on the social media platform X, Dilma Rousseff, President of BRICS NDB, has put to rest speculations concerning the discussion of new operations of the bank in Russia were “unfounded.” In line with restrictions imposed in financial and capital markets, the NDB is not considering new projects in Russia.
Fitch has in the past affirmed NDB ratings at ‘AA+’ because of its strong credit fundamentals, including its large capital buffers. In 2020, it revised the outlook on NDB’s Long-Term Issuer Default Rating (IDR) to ‘Negative’ from ‘Stable’ because of “the presence and role of Russia as a large shareholder”; but in its recent Outlook on the NDB’s IDR has been revised back to ‘Stable’ with an overall assessment of its business environment as ‘medium risk’. The assessment is that the NDB has succeeded in continuing to grow its balance sheet and attract new shareholders, despite the negative impact that the Russia-Ukraine war has had on its operations.
There has been speculation about a new, gold-backed currency. But debates around de-dollarisation are not new and in the past also BRICS has flirted with the idea of a global reserve currency. A new currency would require extensive negotiation and the establishment of mechanisms for exchange rates, payment systems, and financial market regulation. The key focus at the upcoming BRICS summit is likely to be a discussion relating to a long-term integrated payment system for cross-border commerce.
Wider, state-led geostrategy to bypass the dollar is now a reality. Even though a lot of the cooperation among the developing nations is not taking place via the mechanism of BRICS, the war itself has forced emerging economies to seek alternatives to the Bretton Woods system.
What ramifications does expansion have for BRICS?
With as many as 23 nations expressing the desire to join the grouping, BRICS expansion is an aspect that has attracted a lot of media attention. Notwithstanding its current slowdown, China is today the second-largest economy in the world and first on a purchasing power parity (PPP) basis. India is the 5th largest and there is speculation that by the end of this decade, it may overtake Germany. Growth in Russia and Brazil, especially in the second decade has been disappointing. South Africa, has shown a preference to approach the IMF, despite the onerous conditionalities of its loans.
In terms of impact, probably the inclusion of Saudi Arabia might be transformative given its particular importance as the world’s largest oil exporter. But overall, just bringing in more countries to add strength might not be that effective, because the individual performance of these emerging economies is quite different. The NDB has provided loans of nearly $32 billion till now. While this sounds impressive, it pales in comparison to China’s bilateral lending of almost $1 trillion. So if just China and India agree to cooperate on the issues related to trade, cross-border payments, infectious diseases, climate change etc. that would alone have a completely transformative impact on the functioning of the BRICS.
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The current situation is an ideal time for a reckoning of the international relations of the BRICS nations and in particular of their often problematic relations with the West. An unremitting problem with the BRICS financial institutions is the lack of transparency. The other glaring problem is intense internal dissension, particularly between India and China. If the BRICS nations are to effectively challenge Western dominance in the management of financial institutions, they must embrace the multilateralism that the grouping offers, in contrast to the disparate situational objectives that each is pursuing.
Taking lessons from the G7 – which has been encumbered by geo-political statements and positions, BRICS must avoid the politicisation of its agenda. Member nations must continue to build voices around the economy, development, prosperity goals and multilateral systems. Overall, the momentum of the BRICS forum is gaining both in terms of global reach and approach.
Vaishali Basu Sharma is an analyst of strategic and economic affairs.
